Consumer Spending Slows, Putting The Rest Of Year At Risk For Retailers

When the National Retail Federation (NRF) puts out a release with the headline “Consumer Spending Is Slowing,” retailers better take notice. This message is a marked change since the trade association has been consistently upbeat about the retail industry despite the financial pressures shoppers are facing.

“There are ongoing economic challenges and questions, and the pace of consumer spending growth is becoming incrementally slower,” chief economist Jack Kleinhenz reported. He continued, “The current framework clearly increases the chance of a slower economy,” in reference to the Federal Reserve’s actions to control inflation.

Just last month, in the July Monthly Economic Review, Kleinhenz’s tone was predictably sanguine. “The year is half over and the economy is still moving in the right direction. While its rhythm, tone and pattern have slowed, it has not stalled, and recently revised data shows underlying strength that seems to be rolling forward.” The NRF did not respond to my request for comment.

Call me skeptical, but the timing of this announcement suggests NRF sees a major shift ahead, or to quote Shakespeare’s Macbeth, “Something wicked this way comes.” And it didn’t end well for him.

Breaking It Down

Reporting that year-over-year spending growth slowed to 1.6% in the second quarter, after rising 4.2% in the first, the NRF also noted that spending on services was the major growth driver, rather than goods bought at retail.

With consumers under financial pressure, they are “adjusting how much they buy,” Kleinhenz reported. He also remarked that their “stockpile of savings accumulated during the pandemic is dwindling,” thus curtailing their spending power.

Complicating matters further is Americans now stand under $1 tillion in credit card debt, having relied more on their cards to pay for basic necessities rather than discretionary purchases during this extended period of inflation. The average credit card balance now stands just under $6,000 and more than half of credit card holders are worried about their ability to pay off their debt.

Rising interest rates are also taking a toll from Americans’ willingness to put more charges on their cards. On a seasonally adjusted basis at annual rates, the Bureau of Economic Analysis revealed that personal nonmortgage interest payments are 48% higher in the second quarter 2023 compared to same quarter last year, or $462.6 billion now vs. $313.1 billion then.

Conversely, Americans are squirreling away as much as they can in saving, with the second quarter savings rate as a percentage of disposable income up to 4.4% this second quarter from 3.2% last year. They are hunkering down for what’s ahead.

Early Indicators From Back-To-School

Back-to-school shopping trends are typically viewed as a bellwether of retail’s vital holiday shopping season.

In July, the NRF proclaimed that back-to-school shopping would be one for the record books, reaching $41.5 billion from $26 billion in pre-pandemic 2019 and spending up from $697 per household to $890 this year, not adjusted for inflation.

But other forecasters have a different take. S&P Global Market Intelligence sees a 1.8% year-over-year advance or 1.5% when adjusted for inflation.

Deloitte takes an even dimmer view based on its survey of 1,200 Americans with children aged 5 to 18 years. It foresees a 10% cut in per-student spending, averaging $597, down from $661 last year. This will reduce retailers’ total from back-to-school shopping by 9% from last year.

According to Deloitte, parents will lean into essential school supplies, with year-over-year spending up 20%, but cut back on both clothing and accessories, down 14%, and tech products, down 13%. About half of parents who will spend less cite reduced disposable income impacting their BTS shopping plans.

Financial fatigue is stressing this year’s back-to-school shoppers, Deloitte reports. “The entire shopping journey is about minimizing costs this year. Parents are shopping earlier, and they’re choosing to pay with cash.”

And this year, they will favor in-store shopping for the essentials, turning first to mass-merchants (80%) before going online (60%). Only about one-third reported they can find cheaper prices online.

Nearly one-third of parents said their household is in a worse financial situation compared to last year, with lower-income families (45%) feeling the greatest pinch. And across the board, 51% expect the economy to weaken over the next six months, even 46% of higher-income households share this depressed outlook.

In viewing the BTS shopping season and what it could mean for holiday, Nikki Baird, vice president of strategy at Aptos
APT
said, “This back-to-school season is shaping up to be one where consumers overall spend more, but end up buying less. And that could easily lead to a similar impact on holiday spending.”

Retailers’ Feeling The Pressure

This coming week the Census Bureau will report retail sales for July and we’ll get earnings reports from Home Depot, Target
TGT
, TJX Companies
TJX
and Walmart
WMT
. These reports will be key indicators of where retail is heading the rest of the year.

But already, many retailers are experiencing consumers pulling back. In most recent reporting, Macy’s saw a 7% decline in net sales over last year and VF
VFC
revenues dropped 8%, with Vans and Dickies off 22% and 20% respectively. Kohl’s experienced a 3.3% decrease, with comparable sales down 4.3%.

Best Buy
BBY
congratulated itself for meeting its revenue guidance in its latest fiscal quarter, but with comparable sales down 10.1% that’s hardly something to crow about. Gap
GPS
Inc. dropped 6%, with Gap brand down 13% and Banana Republic off 10%. And Lowe’s, which will next report later this month, saw comparable sales drop by 4.3%.

Looking across the financial health of the nation’s leading public retailers, Rapid Ratings finds their Financial Health Rating (FHR) is 61.9 points on a 100-point scale, better than the average across all industries at 55.6 points, but public retailers’ FHR dropped 6.7 points since the end of 2021, making it the second biggest declining industry sector in that time.

“The pain in retail is felt more by the smaller players,” Rapid Ratings’s executive chairman James Gellert observed. “The larger they are, the more resilience they’ve got in terms of cash, access to capital and leverage with suppliers, not to mention many companies are still recovering operationally from Covid disruptions. It’s creating a perfect storm with a whole cohort of retailers that have been pinched and are still operationally weaker.”

From Bad To Worse

There is no question that consumers have been answering retailers’ rallying cry for an extended period coming out of the pandemic. But they may have reached the end of their rope and retailers should expect a sharp pullback in their spending, which obliviously NRF sees coming.

Earlier this year, S&P Global Marketing Intelligence predicted retail sales growth of only 0.5% in 2023 or a 0.1% decline after accounting for inflation. That forecast was delayed by a surprisingly strong first half of the year, with NRF reporting 4% growth, excluding automobile dealers, gasoline stations and restaurants. But the second half of 2023 is shaping up more in line with S&P Global’s expectations.

“Persistently high inflation and weakening consumer demand are eating into U.S. retail sales expectations this year,” it reported. “This year’s retail sales will help determine whether the U.S. enters a recession as consumer spending accounts for nearly 70% of U.S. GDP.”

And Phil Orlando, chief equity strategist at Federated Hermes, added, “If the consumer is pulling in their horns, then to a significant degree that is going to contribute to slower economic growth and maybe recessionary growth.”